A life insurance policy is a non-qualified plan.
Qualified money is “before tax” money.
This means you did not pay taxes on this money when
you invested it. While invested, this money will grow tax-deferred. No taxes will be owed on gains within the account
each year and therefore you will not get a 1099 form each year. Qualified plans
receive this special tax treatment because they were designed with retirement
in mind.
Of course, if you don’t pay the taxman
now, you will simply pay him later. Taxes will become due on a Qualified plan
each year that you draw an income from the plan. And if you decide to take the
money out before the current minimum distribution age of 59 1/2, you will also
pay a stiff 10% penalty to the IRS on the entire withdrawal amount. Finally,
once you reach age 70 ½, the IRS requires you to begin taking required minimum distributions from your Qualified account each
calendar year.
Non Qualified money is “after tax” money.
When you invest outside of a “Qualified” plan, you do
not get to write off this investment on your taxes. Put simply, money invested
into Non Qualified plans will not get an upfront tax break.
Additionally, the investment earnings could be taxable each year. It all
depends on the type of investment you use.
For example, if you place your Non Qualified
investment dollars into a CD at the bank, you will have to pay tax on the
interest earnings every year. Each year, the bank will send you a 1099 tax form
showing you the amount of interest earned. You are required to pay taxes on
those earnings for that specific tax year. Note that you will have to pay a tax
on these earnings regardless of whether you took the money out of the Bank CD
or not.
